Does China Rare Earth Resources And Technology (SZSE:000831) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that China Rare Earth Resources And Technology Co., Ltd. (SZSE:000831) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for China Rare Earth Resources And Technology

How Much Debt Does China Rare Earth Resources And Technology Carry?

The image below, which you can click on for greater detail, shows that China Rare Earth Resources And Technology had debt of CN¥100.1m at the end of June 2024, a reduction from CN¥150.1m over a year. However, it does have CN¥1.59b in cash offsetting this, leading to net cash of CN¥1.49b.

How Strong Is China Rare Earth Resources And Technology's Balance Sheet?

We can see from the most recent balance sheet that China Rare Earth Resources And Technology had liabilities of CN¥544.3m falling due within a year, and liabilities of CN¥69.5m due beyond that. Offsetting this, it had CN¥1.59b in cash and CN¥765.9m in receivables that were due within 12 months. So it actually has CN¥1.75b more liquid assets than total liabilities.

This short term liquidity is a sign that China Rare Earth Resources And Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Rare Earth Resources And Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact China Rare Earth Resources And Technology's saving grace is its low debt levels, because its EBIT has tanked 99% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Rare Earth Resources And Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China Rare Earth Resources And Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, China Rare Earth Resources And Technology generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Rare Earth Resources And Technology has CN¥1.49b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥68m. So we are not troubled with China Rare Earth Resources And Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with China Rare Earth Resources And Technology , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.